The economic situation in Germany in May 2018

Introduction

The German economy’s upswing continued in the first quarter of 2018. The economy did soften to some extent, but this was largely due to special factors. The upswing is continuing.

The goods-producing sector took a breather in the first quarter. There was actually a decline in new industrial orders. However, the business climate is still above average.

Consumer spending remains strong. In view of the good environment, the retail sector is optimistic.

Continuing high demand for labour in many sectors of the economy means that the employment rate is continuously rising. Employers continue to face great challenges as they try to recruit workers. Work still needs to be done to reduce higher levels of unemployment in structurally weak areas and to cut long-term unemployment.

The German economy again grew strongly in the first quarter of 2018. [1] Gross domestic product expanded by 0.3% (price-adjusted) compared to the previous quarter. [2] As expected, the rate dipped below what was for the German economy a rather high average quarterly growth rate of 0.7% in 2017. Demand for industrial products, both from Germany and from outside the eurozone, was lower than in the previous quarter, resulting in a drop in exports. On top of this, certain special factors impacted temporarily on growth. In addition to the wave of influenza, the increased number of strikes and the early dates of the Easter holidays, a significant role must also have been played by the fact that the Federal Government was running a provisional budget. There are certainly a variety of reasons for the weaker foreign demand. It is currently hard to estimate the extent to which a role was played by any uncertainty caused by the tougher rhetoric on foreign and trade policy of the U.S. administration from the beginning of the year. In overall terms, however, the German economy is continuing its upswing. The global economy basically remains in good shape, and the German economy remains growth-oriented, for example in terms of its demand for labour. It is true that the relevant business climate indicators are not quite as positive as at the beginning of the year, but their above-average level argues clearly in favour of a continuation of the upswing, albeit perhaps at a slightly different pace.

The trend in the global economy is expansion at a high pace. Nevertheless, global industrial output began the new year sluggishly, but in February was still 3.9% up in year-on-year terms. Viewed across the year, the strongest impetus is coming from the Asian emerging economies, whilst output in the developed economies has also expanded significantly. The future outlook for the broad-based upswing in many regions remains positive, even if its rate of growth is unlikely to increase very much further. The global Markit purchasing managers index rose in April and remained well within its growth zone. The ifo World Economic Climate index softened in the second quarter, particularly in terms of business expectations. The IMF and OECD expect the global economy to grow by 3.9% in both 2018 and 2019.

Against the backdrop of the less dynamic external economic environment, German exports of goods and services recently slowed. They fell by 0.3% in the first quarter of 2018 compared with the preceding quarter in current prices. The ifo export expectations in the manufacturing sector also registered a further fall in April. The current U.S. trade policy might have been a factor behind this. Nominal imports of goods and services did not change between the first quarter and the preceding quarter. In view of rising domestic demand, they are likely to expand in the course of the year.

Industry had a slow start to the year. Its output only rose by 0.1% in the first quarter as a whole from the preceding quarter’s level, despite a 1.0% rise in March. Construction output rose by 0.6% in March, and in the quarter as a whole also only by 0.1%. In the industrial sector, capital goods expanded by 0.2% and consumer goods by 2.0%, but the output of intermediate goods fell by 0.9%. New industrial orders dropped by 0.9% in March, which was mainly due to a smaller number of large orders. The first quarter as a whole actually saw orders down by 2.4%. Both domestic demand (-2.1%) and demand from outside the eurozone (-3.6%) declined. The upswing in the industrial sector is however continuing, especially in view of special factors in the first quarter like a higher number of strikes, the wave of influenza and the position of the Easter holidays, all of which presumably impacted on output. The overall external economic environment is positive, the stock of orders is at a record level, and the business climate is above average. The news from the construction industry proper is also tending to be positive. Following a calmer period, output in the goods-producing industry will therefore pick up speed again.

The indicators for consumer spending provide a mixed picture, but one which is slightly positive in overall terms. Retail sales dropped by another 0.6% in March. This means that the sales were down by 0.8% in the first quarter compared with the preceding quarter. In contrast, the number of new vehicle registrations, particularly by private owners, developed very encouragingly in the first quarter. The ifo business climate index for retailers did brighten somewhat in April, but the GfK Consumer Climate Survey forecast for May fell slightly. Both indicators are at an above-average level. In view of the favourable development in incomes and employment, consumer spending is therefore likely to continue to contribute to growth.

The positive developments on the labour market are continuing against the backdrop of the usual spring recovery. Despite the latest slight fall, the leading indicators are continuing to point to strong demand from companies for labour. In March, seasonally adjusted employment increased by 32,000 persons and employment growth (+1.4%) is very high for the year as a whole. The rise in employment subject to social security contributions was not as high in February as in the preceding months, but remains very strong (+53,000 people). The number of unemployed fell further in April and dropped below the 2.4 million mark (unadjusted figures). It dropped by 7,000 compared with March. Underemployment, which also includes people in labour-market schemes and short-term incapacity to work, fell more sharply. It remains necessary to tackle long-term unemployment and higher joblessness in structurally weak regions.

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Note:
A detailed report and commentary on the overall situation and trends in the German economy will be published in the May edition of the monthly report, Schlaglichter der Wirtschaftspolitik (“Economic policy highlights”, in German only). This report is expected to be available on the website of the Federal Ministry for Economic Affairs and Energy in the course of the 22nd calendar week of 2018.

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[1] The report is based on statistical data that were available as of 15 May 2018. Unless stated otherwise, these are rates of change against the respective preceding period on the basis of price-adjusted figures which have also been adjusted for calendar-day and seasonal variations.
[2] Press release by the Federal Statistical Office of 15 May 2018. .